Apple (NASDAQ:AAPL) is about to transform again. The results of this chrysalis-to-butterfly moment won't be as pretty and profitable as the current model, but the new Apple might be a great play for income investors.
The company has gone through a couple of drastic changes in recent memory. More than 15 years ago it leveraged a $150 million cash infusion from Microsoft (NASDAQ:MSFT), of all sources, to step away from the brink of bankruptcy and become a healthy computer systems builder again -- with a side of high-quality audio players and a brand new retail store network, of course.
The next radical move came when the original iPhone made it cool to have a smartphone. The device was not only fashionable and functional, but also extremely profitable. The resulting boom turned Apple into the world's most valuable business, and was fantastic news for shareholders.
Apple's market cap surpassed Microsoft's in 2010. The very idea would have been laughable in 1997, when that $150 million olive branch was extended.
But now we're looking at another huge change. This time, it's not driven by a fantastic Apple product or visionary leadership. This time, market realities are making their mark on Apple rather than the other way around.
Take a look at the two charts below. They cover the last three and a half years of Apple's financial growth, or roughly the iPad era. You'll see the most dramatic part of Apple's rise to power, followed by a clear peak and an inevitable decline.
The first chart shows you how Apple's financial growth has reversed in recent quarters. In four of the last five reporting periods -- including the report filed this week -- Apple actually reported shrinking cash flows. The last two quarters also included falling earnings, and top-line revenue growth has stalled to just 1% year over year.
Apple is not hitting a brick wall here, but the days of fantastic growth are over.
The second chart smooths out seasonal effects by looking at trailing-12-month numbers. Again, the overall trends are pretty obvious. Apple delivered its finest hour of growth across the board in 2011 and early 2012, fueled by the last iPads and iPhones touched by rainmaker Steve Jobs. The growth engine has been stalling ever since.
I called the Apple peak a few months early in market terms, but the call was spot on when you look at these charts. It just took a couple of quarters for investors to realize how empty this growth engine's fuel tank really was. My bearish CAPScall on Apple has been cheerfully green for a while, even though I missed the actual top. That's OK; Fools generally don't worry about perfect market timing.
And now it's time to remove that bearish CAPScall. At this point, Apple looks set to trade sideways for years to come, and that thesis isn't worth a virtual "short" investment. So I'm taking this chip off the table to lock in my positive CAPS score from Apple.
This is where Microsoft steps right back in the discussion again. You see, Redmond's shares have been stuck in neutral for so long, the only way to have made any long-term gains on the stock would be to reinvest the dividend (or just pocketing the quarterly payouts).
If you bought Microsoft shares at the start of 2003 (just before Redmond's first ex-dividend date), you'd have gained $5.48 in share price increases over the last decade. Meanwhile, dividend checks added up to $5.23.
Microsoft suffered a creative crisis over the last decade, where every new product seemed to be just a refined version of something Redmond already had on store shelves. Customers caught on and slowly stopped paying a premium for the Microsoft brand. And the stock transformed from a red-hot growth vehicle into a safe, predictable value and income play.
That's the kind of future Apple investors should expect at this point. Cupertino has been playing the refining game for years already, focusing on different sizes of the same iOS-based slate concept.
Consumers will keep buying them for years to come, mostly because it's what they're already used to. Kind of like buying Microsoft Windows PCs because it's familiar, not because it's better than MacOS or other alternatives. But the market for this particular type of mobile gadget, with this particular user experience, is getting mighty saturated.
The proof is in the financial pudding above, not to mention Apple's stagnant unit sales. In the third quarter, Apple sold 45.8 million iPhones and iPads combined, just 6.5% above the year-ago quarter's 43 million.
So it's time to accept that Apple is becoming the Microsoft of the next 10 years. The company is far too big and rich to die entirely, but margins will shrink and P/E ratios will compress. This is a value and income stock now, and hardly the growth play of years past.
Fool contributor Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.